Avoiding Chaos: Best Practices for Quarter & Year-End

Payroll Tax Management

A Whitepaper

Avoiding Chaos: Best Practices for Quarter & Year-End Payroll Tax Management

Table of Contents

I. Executive Summary

II. Quarter-End Best Practices

III. Year-End Best Practices

IV. Saying “No” to Clients

V. Conclusion

VI. About Payroll Tax Management

I. Executive Summary

How efficient and effective is your quarter-end (QE) and year-end (YE) payroll tax preparation for your clients?

You probably wouldn’t be reading this whitepaper if every quarter-end and year-end ran perfectly, so this whitepaper includes best practices for processing quarter-end and year-end on time, stress-free, and in full compliance with all government regulations.

This whitepaper covers the following:

QE Best Practices

YE Best Practices

Just Say “No”

II. Quarter-End Best Practices

Most QE disasters are caused by:

• Inefficient internal and external communication

• Improper planning

• Not effectively handling variances

• Failing to hold your staff and clients to deadlines

• A variety of other factors

Here’s how to avoid these disasters.

Getting Organized

Create a checklist of QE tasks, each with who’s responsible and its own deadline, helps ensure that everything gets done on time – just make sure that everyone, including clients, sticks to them.

We recommend attaching monetary penalties for clients’ failure to comply, as long as they know their responsibilities up front, including distributing a calendar at the beginning of each year and a system to remind them throughout the year. Client newsletters can also help.

II. Quarter-End Best Practices (continued)

Check Client Data

This includes:

• Negative tax and wage totals

¤ Need to run checks at the client and employee levels

• Social security number verification

• State unemployment insurance (SUI) rates

• Quarter-to-date balancing for mid-quarter starts

• Applied For IDs

• Review voided checks and vouchers run early in the quarter

If you process payroll on behalf of other companies/clients, you’ll also want to review clients that operate in states that require third party authorization (TPA), to ensure clients have granted access for you to remit payments and file returns.

Review Agency Requirements

You’ll want to start by checking e-file requirements to ensure compliance, including zero returns. Then review inactive agencies and procedures for final returns/inactivating agency accounts. Lastly, double-check agencies that require clients to give payment and filing permission online.

II. Quarter-End Best Practices (continued)

Applied For Agencies

Agencies are becoming stricter about proper employer identification numbers (EINs). Most agencies will give EINs online instantly.

Even if an agency accepts Applied For payments and filing, they often botch the processing, resulting in notices being sent to clients. To prevent this, run reports to review Applied For EINs in your system. Ideally, this should be done weekly and not just during quarter-end.

Re-Grouping

Immediately after each quarter processing is complete, we suggest that you recap your successes and challenges to identify new efficiencies to be created for next quarter.

To achieve this, we recommend scheduling amendments and make completing them a top priority. Holding planning meetings periodically in-between QE months will help, as it’s important to always be preparing for, processing or cleaning up from QE.

III. Year-End Best Practices

With quarter-end under control, it’s time to focus on having a successful year-end. Here’s how to do so.

Getting Started

We recommend starting year-end as soon as you are done with your third quarter filings, although balancing and planning should actually start in February (when you complete last year’s year-end filing).

Start with your quarter-end checklist and update it to reflect additional year-end activities, including the identification of who is responsible and when:

• W-2 testing and balancing • Year-to-date balancing • Annual and W-2 reconciliation, processing and filing

Stock Up

To help avoid last minute scrambling, do yourself a favor and make sure you have an adequate supply of the following:

• Check stock and MICR toner • Paper • Mailing supplies, including envelopes and boxes • W-2 stock and envelopes • Pizza coupons (hopefully, these will not be needed)

III. Year-End Best Practices (continued)

Agency Deadlines

Agency requirements and deadlines for year-end are all over the place. To ensure that you’re prepared, make sure you have answers to the following:

• Is there an annual reconciliation due? ¤ This may vary by deposit frequency

• Are W-2s due? ¤ Are they due with the annual rec?

• When are W-2s and the annual reconciliation due? ¤ This could also depend on filing method

• Keep a close eye on clients in early filing states ¤ When annual reconciliation returns are due by or before the end of January

Check-In on Your Payroll Tax Software Provider

You’ll want to make sure your payroll tax software provider has programmed the latest W-2 specs and any other new year-end requirements/deadlines. More and more agencies are mandating electronic filing each year so, if you process taxes in-house and/or file your own W-2s, this will make sure you’re in compliance.

FUTA credit reduction states aren’t finalized until late in the year, so check to ensure your software provider has programmed this to ensure compliance.

(continued on next page)

III. Year-End Best Practices (continued)

You also want to start thinking about January 1. Ensure that your system is compliant to start running January payrolls in late December, including new wage base limits, updated new employer SUI rates, deposit frequencies, new thresholds, and electronic mandates.

Employee Verification

It’s imperative to verify that all employee information is correct and complete.

In the age of direct deposit, most employees don’t bother to look at their pay stubs. As long as the deposit is in their bank on time, they’re happy. Use any format that works for you, but notify all current employees that they must review the information on their pay stub and notify HR/Payroll that they have done so. This should be done during November.

You’ll also want to reach out to former employees via email or last known address and phone number and verify that the information on file is correct. Items to verify include the spelling of their name, Social Security Number, address, and that the correct state and local tax(es) have been withheld.

The goal here is to avoid the employee discovering that the wrong state tax has been withheld all year when they meet with H&R Block in March…

III. Year-End Best Practices (continued)

Balancing Mid-Year Starts

If you run taxes with the tax engine in your payroll system, ensure that all totals processed by the previous payroll provider have been loaded. If you use a payroll tax compliance software or service, ensure that prior data has been loaded in that system, and that audit reports have been run.

Year-to-Date Balancing

Balancing as you go is the best practice when handling year-end. Ideally, quarter-to-date and year-to-date balancing reports should be run weekly.

At a bare minimum, run balancing reports weekly after Thanksgiving. This will give you a “heads up” for any issues and allow you to resolve them before you run your last payroll of the year.

Last-Minute System Checks

Check to ensure all amendments are accounted for in the system. You will also want to prevent clients from recording adjustments in the wrong quarter, as well as to check for signs they have gone around your controls.

Performing one last audit of history loaded from prior processors is a good idea. You’ll want to know of any special requirements for the states in which you process, and ensure you have loaded that data for mid-year starts.

Lastly, you’ll want to double-check the Federal Unemployment Tax Act (FUTA) rate in your system. Some are defaulted to 0.6%. It’s beneficial to know how to make adjustments in the event a client does not pay state unemployment taxes as the rate in this case would be the full 6%.

III. Year-End Best Practices (continued)

FUTA Credit Reduction

Even though the economy has experienced a resurgence, some states still face a potential FUTA credit reduction, so remind clients frequently so they aren’t shocked if they owe extra. You’ll want to collect variances with ample time to verify funds prior to remitting payments.

For FUTA updates, check: http://oui.doleta.gov/unemploy/DataDashboard.asp

Communication with Clients

There is no such thing as too much communication. Here are guidelines that we follow ourselves:

• Communicate the same topics every quarter/year-end ¤ Frequent reminders of important deadlines

• Keep it short and to-the-point

• Use common language ¤ Don’t talk down to them, but don’t assume they know ¤ Avoid industry and internal company jargon

• Make sure your facts are straight and your grammar and spelling are accurate

III. Year-End Best Practices (continued)

Audits & Tracking

As a final step, we recommend establishing audits for daily, quarter-end and year-end filing. Everything that leaves your office, including paper or electronic, payment or filing, must be accounted for so you’ll want to establish a series of checks and balances for your protection. We recommend having a second set of eyes audit the data, so you may need to pull in people from other departments or capacities.

IV. Saying “No” to Clients

That’s right, we said “No”.

Sometimes You Have to Say No

You are the expert, not the client. They will blame you for any errors, even if they directed you to do something a certain way – even if you warned them of the consequences and they insisted anyway. So make sure that none of the following occurs:

• Back-dating payrolls • Demanding money refunded for checks voided after deposits are remitted (issuing refunds on back-dated payrolls) • Changing employees to 1099 status • Taxing employees in the wrong state because they want to pay the experience rating in their home state • Reincorporating or changing entity mid-quarter or mid-year as a tax dodge • Successor/predecessor treatment of entity changes • While not illegal, they are incredibly complex and agencies rarely handle them correctly. Problems can drag on for years! • Delaying tax payments due to cash flow problems • Accepting “I’m good for the money” • Paying penalties for their errors

Your clients won’t leave you for refusing risky requests because the big-box providers will also decline them. If a request could leave you holding the bag, you owe it to your business to say no.

IV. Saying “No” to Clients (continued)

Standing Firm

Saying “no” is a lot easier when you have established rules (and deadlines) for your clients to protect them and your company. As part of establishing these rules, we recommend that you:

• Treat clients like employees and have rules written out in a policy manual or some other document

• Explain to clients why the rule exists

• Understand that if you break it once, you establish precedence

• Let the policy be the bad guy

• Attach monetary incentive (penalty) to rules

V. Conclusion

If you need help implementing these quarter-end and year-end best practices, let us know. We offer both software and services to ensure correct, compliant and stress-free payroll tax management for our clients.

VI. About Payroll Tax Management

Payroll Tax Management, Inc. (PTM), a wholly owned subsidiary of FBG Holdings, Inc., is a national payroll tax processing company headquartered in Santa Ana, California. PTM has representation and satellite offices nationwide. PTM provides payroll tax software and processing services for corporate clients and the payroll service industry. This includes all aspects of payroll tax processing to Federal, State and Local Taxing Authorities in all 50 States and U.S. Territories, as well as Canadian Tax Processing. PTM also provides ancillary services, such as; W-2 print and distribution, garnishment payments and new hire reporting. More: www.payrolltaxmgmt.com

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